The Takeaway: Estate Tax Battle Returns

The estate tax has long attracted heated debate despite the relatively small number of American families it affects (for now, only those who inherit more than $5 million). With $7 trillion in tax hikes and spending cuts set to take effect next year unless Congress acts to stop them, debate about this politically charged tax–opponents have labeled it the “death tax”–is likely to rev up again soon, warns CNN Money.

An estate tax increase is one of the smallest pieces of the pending fiscal cliff, but it’s as politically charged as any in a time of deficits and debates about tax fairness.

According to the American Bar Association, the amount of money subject to the estate tax has been set at six different levels since 2011, and the top rate adjusted nine times. This year, estates under $5 million are exempt from the tax. Inheritances above $5 million are taxed at a varying rate that tops out at 35 percent. Barring congressional action, next year’s estate tax will apply to all estates over $1 million, and the top rate will jump to 55 percent. There would also be a 5 percent surtax on parts of very large estates.

Even with this change, the tax would only apply to about 2 percent of people who die in 2013, or about 53,000 estates, according to the nonpartisan Tax Policy Center. So, as CNN puts it: What’s the fuss?

A tax on the transfer of wealth at death has been on the books in one form or another since 1797, according to the Joint Committee on Taxation. Initially, the tax was a way to raise revenue for warfare. But by the early 20th century, it was intended to break up large concentrations of wealth among the very few.

Yet many conservatives, including Mitt Romney, would like to do away with the estate tax altogether, or at least preserve the current $5 million exemption and 35 percent top rate. Meanwhile, many liberals welcome the broadening of the estate tax’s parameters. President Obama has suggested a compromise: a tax on estates over $3.5 million and a top rate of 45 percent.

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